Excerpts from these updates should include quotation marks, and
identify the author as John P. Hussman, Ph.D. A
link to the Fund website, www.hussmanfunds.com is
appreciated.

Thursday Morning December 28, 2000 : Special Hotline Update

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The Market Climate is characterized by extremely unfavorable valuations and modestly
unfavorable trends. On Monday, I noted that the Treasury yield curve had become more
"normally" sloped, with short term interest rates dipping below long term rates.
In general, that's a healthy sign. Tuesday's bond market trading quickly reversed that,
however, with short term Treasury yields soaring back above long-term yields. That
condition is consistent with a further slowing in the economy and a deeper ultimate market
decline.

Shorter term, however, I increasingly suspect that this bear market could see several
weeks or even a few months of consolidation before resuming a strongly downward course.
The main reason for that suspicion is that market internals have improved significantly in
recent days. Most notably, the advance decline line has firmed, and higher grade corporate
bonds are also holding up better. We still haven't seen a move to favorable trend
uniformity, but market internals are clearly moving in the right direction.

If market conditions do shift to a favorable trend status, we expect to move to a
still-hedged but significantly more constructive position. Extreme valuations, an inverted
yield curve, high bullish sentiment, continued insider selling, and likelihood of an
oncoming recession strongly argue against an unhedged position. So I would consider any
move to favorable trend uniformity as indicating a likely consolidation or stabilization
within a bear market, rather than a bullish outlook.

Our investment stance remains defensive for now, but we are not raising our strike
prices or increasing our hedge positions in any way in response to market strength. We'll
allow market action to dictate any shift in the Market Climate, and there's no need to
second-guess whether we'll see such a shift or not. Again, if we do shift to favorable
trend uniformity, it would indicate a likely consolidation within a bear market, rather
than a bullish outlook. We have no intention of holding an unhedged market position given
the backdrop of market negatives, but we would not be averse to a somewhat more
constructive stance if trend uniformity allows.

With the Fed likely to ease at its January meeting, the market will face two opposing
forces. On the positive side, lower interest rates, and on the negative side, a continued
and nearly inevitable slowing in earnings growth. Those two opposing forces may allow
price/earnings ratios to hold up somewhat longer, which would be consistent with a
consolidation or counter-trend rally. Even if we did see such a climate, I would
ultimately expect slower earnings growth to reveal the absurdity of market valuations, so
the bear market would be likely to reassert itself despite any Fed moves that might be
forthcoming.

In short, we're currently defensive, but are making no moves to add to that stance. We
are prepared to move to a still-hedged but somewhat more constructive position in the
event that trend conditions improve further. No need to second guess if or when. We'll
know if and when it occurs, and that will be the appropriate time for any shift in market
posture.

Monday December 25, 2000 : Hotline Update

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Merry Christmas!

The Market Climate is characterized by extremely unfavorable valuations and modestly
unfavorable trends. The main thing to note: the bond market started screaming something
last week, and we're paying close attention. Specifically, short term interest rates
declined so significantly that the yield curve began to normalize, and market breadth also
improved. Now, there's certainly little possibility of a new bull market from current
conditions, and we continue to expect earnings problems as weakness in the economy
pressures profit margins. But yields are currently being pressured lower, and that argues
against the strong upward spike in stock yields that would have to occur in a crash. So at
this point, there's an increasing likelihood that this bear market will be drawn out
somewhat.

Think of it like this. Stock prices are simply the product of earnings and the
price/earnings ratio. While earnings growth is likely to slow, and even drop to negative
levels for technology stocks, a market crash always exhibits a sharp collapse in
price/earnings ratios. Historically, that has occurred with much more regularity in
environments of rising interest rates than in environments of falling rates. Given the
extent of the damage to the market so far, it's also not out of the question that if trend
conditions improve further, we could see what you might call a "counter-trend
rally" - something on the order of several weeks or even a few months. We're not
expecting that yet, but our trend models are designed to pick up improved trend conditions
sooner rather than later if they improve.

In short, although I do believe that stocks remain in a bear market, and my opinion is
that high P/E technology and banking stocks should still be strongly avoided, our
discipline places great importance on the signals conveyed by market action. Right now,
bond market action has improved enough to move away from a Crash Warning. It's always
possible that a crash could still occur, especially given the need to satisfy margin calls
from as recently as last Wednesday, but it's no longer so likely as to put it on a
"Warning" status.

Bottom line: We're in a bear market and market conditions remain negative overall. The
appropriate position remains defensive, but we've eased our expectations regarding crash
risk. If the market can generate even better bond market action and more favorable
breadth, we may even see a favorable trend condition and be able to capture a
counter-trend rally with a less hedged position. We're not at that point yet, but if our
models were to identify more favorable trend uniformity we would shift to a still hedged
but more constructive market position. Our job is to identify shifts in the market
environment and position ourselves accordingly. We're seeing some better bond market
action, and it's important to mention that. With our trend models still negative, we're
not shifting our position at this point, but we are softening our tone. For now, we remain
appropriately, but not aggressively defensive.

Friday Morning December 22, 2000 : Special Hotline Update

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The Market Climate remains on a Crash Warning, but there's a strong likelihood we'll
shift to an "extremely unfavorable" condition at the end of the week. In our
most aggressive managed accounts, we rolled our OEX put options from the February 700
strike to the February 680 strike on Thursday morning for a nice credit. We still hold the
same number of puts as before, but we've taken a good deal of profit off of the table to
allow for the ever-present possibility of a bounce. My opinion is that we won't get much
sustainable upside, because margin calls have been going out. Wednesday's calls will have
to be satisfied by Tuesday of next week. So my opinion is that we could see some real
pressure develop then. That said, we don't invest on my opinions, so we've rolled our
strike prices down. We're still quite defensive, but we like to take opportunities to lock
in profits on our options when the market gets particularly oversold. Thursday morning
gave us a nice opportunity.

I've been watching the NYSE Composite. It has found support 3 times now at the 625
level. A close much below that level would be a good sign that the overall market is going
to start looking more like the Nasdaq.

A great comment from Richard Russell today: "What's wrong with this market? Here
it is in a nutshell. General Motors has $17 billion in sales, it's market capitalization
is $28 billion. Juniper Networks has a market capitalization of $31 billion. It has sales
of $102 million - that's million. Is JNPR overpriced? You do the math. JNPR has already
dropped from 244 last October to 100 today. What's the stock really worth? Damned if I
know, but it's not worth more than GM."

I have to agree. Even though people are talking about values and bargains and finding a
bottom, the basic fact is that value isn't determined by how far a stock has fallen from
its highs. Value is based on the relationship between prices and properly discounted cash
flows. The darlings of the Nasdaq are still ridiculously overpriced in my view. There are
certainly areas of emerging value, and in the broad market, even some very favorable ones.
But among the largest capitalization stocks that drive the major indices, there is more
room for downside than investors might imagine.

Just a thought. Historically, markets bottom about the midpoint of very well recognized
recessions. At that point, investors aren't talking about the market finding a bottom.
They're panic stricken that there is no bottom. Once it is widely agreed that the
economy is in recession, it's well recognized that business conditions are bad, but it's
also expected that they'll turn worse. That's when you can start talking about a bottom.
And I'm fairly certain that we won't see the number of bearish investment advisors still
under 30%, as it is today.

Another thought. Does anybody doubt that the Fed will ease in January? Anybody? [Pause]
I didn't think so. My impression is that it's already priced in, for exactly that reason.
At this point, the only kick the market can hope for is if the Fed cuts by 1/2% rather
than 1/4%. I have little doubt that that's the next line the market analysts will be
tossing out to investors looking for hope.

As for our position, we're still on a Crash Warning, and likely to move to an extremely
unfavorable climate at the end of this week. That keeps us in a defensive position. If we
get better breadth, broader trend uniformity and an improvement in corporate bonds, we'll
quickly become more constructive. We'll know it when it happens, and that is precisely the
point at which we'll shift our position. Until then, we remain appropriately defensive.

Thursday Morning December 21, 2000 : Special Hotline Update

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The Market Climate remains on a Crash Warning, though my expectation is that the
climate will shift to an "extremely unfavorable" condition at the end of this
week. That doesn't actually imply a change in our investment position, but it at least
allows for the possibility that this bear market will be drawn out and churning. For now,
we remain on a Crash Warning.

There are several important developments that we're watching. The first is the action
in Treasury bonds, with yields in a downtrend. The yield curve is still inverted, however,
and that has historically been a profound negative for stocks. A profile of declining bond
yields and an upward sloping yield curve (long term yields higher than short term yields)
would be a more convincing positive. That's just not the case here, and it's one of the
reasons why strong bond market action alone can't be expected to underpin stocks here.

As expected, Cisco, Sun Microsystems, and the financials have finally submitted to the
bearish trend. With capital spending turning lower, and defaults on the rise, I noted in
recent weeks that it would be illogical to expect those stocks to remain strong. With the
weakness in those bellwethers, the bear market has now taken force in earnest. But bear
markets are difficult to navigate if you don't fully prepare yourself for monster rallies
that can emerge from time to time. So even though I believe we're still in the early part
of a bear market, I am as usual completely agnostic about short term action.

Two main areas of concern here are the U.S. dollar, about which I've written
extensively, and the potential for margin calls here. The dollar continues to be pressured
lower, and the real question here is whether we'll start seeing foreign sales of U.S.
Treasuries. Remember that foreigners hold well over a third of the public float in
Treasuries, and with yields now quite low and the dollar sliding, there is little
incentive for foreigners to hold them on the basis of return-on-investment. If there's one
thing that could make the recent decline in interest rates reverse dramatically, that
would be it. And I don't believe we should rule it out. Moreover, a plunge in the dollar
would make Fed easing a much more difficult task, and would certainly reduce the
aggressiveness with which the Fed could go about it.

Finally, margin calls. I noted several weeks ago that the market was nearing the point
where margin calls could become a significant issue. I believe we're here. So while
there's a good possibility that we could get some attempts to buy the dip here, there's
also a growing spectre of forced selling. In other words, we're now at about the point
where we can reasonably expect that investors may start selling out of necessity rather
than choice. That's one ingredient for a crash.

So that's where we are. I strongly believe that stocks are in an ongoing bear market,
and now that comment doesn't seem nearly the stretch that it may have seemed in early
September. Interest rate trends and a clearly oversold market condition allow for the
possibility of typical fast and furious bear market rally. On the negative side, the yield
curve is inverted, which has never sustained good bull moves. The dollar is under
pressure, raising the possibility of foreign liquidation of U.S. securities. And margin
debt is likely to trigger some forced liquidation here, seemingly out of nowhere. Yet even
with those opposing forces, our investment stance is simple and clear. The Market Climate
remains on a Crash Warning for now, and we are appropriately defensive.

Finally, a reminder. I realize that every analyst on CNBC wants to tell you where they
think this market is going. But really, it's not useful to think in terms of forecasting
the market, or to base your investment plans on my opinions or anybody elses. I
certainly do hope that my comments are useful in interpreting what's going on in the
markets, but be assured our investment discipline is not about making forecasts and then
hoping they are right. It is about identifying the Market Climate that is currently in
effect and holding a position consistent with that climate until a shift is objectively
identified. That takes a lot of the hoping, praying, worrying, second-guessing, and
general emotion out of what we do, and for one, I like it that way.

I want to wish all of you a very Merry Christmas, and a happy Hanukkah. I always
appreciate your business, but as you probably know, I am most grateful for your trust.
I'll do everything possible to treat it well.

Tuesday Morning December 19, 2000 : Special Hotline Update

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The Market Climate remains on a Crash Warning. In our most aggressive accounts, we
moved our OEX put options down to the February 700 strike for a good credit, keeping our
defenses intact, but reducing the amount of put value exposed to a possible bounce. We
certainly aren't positioning ourselves in anticipation of such a bounce, but we
have to allow for the possibility of the usual fast, furious bear market rallies that can
occur after the market becomes oversold. And though we have to allow for a possible rally,
we also have to allow for the possibility that the market responds badly if the Fed's
policy statement doesn't heavily emphasize recession risks. In short, near term direction
is a coin toss, but the next few days could involve a sizeable move one way or another.
Overall, our position remains defensive, but we're managing our risks in a way that
accomodates the possibility of a bounce.

It's unfortunate, in my view, that investors have so much faith that a monetary easing
can and will bail out the economy and the stock market. My view is fairly simple - the
economic boom we've enjoyed has been driven by an inordinate amount of leverage, much of
it of very poor credit quality, and by capital spending financed through the import of
foreign savings. In an environment where demand for new capital investment was strong,
easy bank credit and ample foreign savings fed extremely good economic growth rates. But I
believe we are past that point here.

First, much of the frenzy for capital spending, particularly on information technology,
was driven by a desire of companies to keep up, and avoid falling behind the competition
at any cost. Now, it's much clearer that companies can and perhaps should move more
slowly, and that has caused a rash of order cancellations and slowing sales that we
observe daily in new earnings warnings in the tech sector. I doubt that the demand for
this sort of IT spending will rebound even if credit becomes more available.

Second, the banking sector has become much more aware of credit risk in recent months,
so again, even if the Fed eases, it's not clear that this will translate into nearly the
same boost to bank lending as we saw in recent years. A Fed easing works only if there is
unsatisfied demand for loans to make new investments, and then only if banks are willing
to make those loans. In the current economy, both the demand for new investment, and the
willingness to make loans are compromised.

Third, there is growing pressure on the U.S. dollar. The U.S. dollar index has broken
down from a very clear double top. With the economy weakening and U.S. interest rates
headed lower, while U.S. inflation remains in a rising trend, we have the combination of
an overvalued dollar in an unfavorable trend environment. Just as those conditions are
negative when they occur in stocks, they are currently putting significant downward
pressure on the dollar. And if the dollar does fall hard, it's going to make easier money
and interest rate cuts much more difficult for the Fed.

In short, the boom was driven by strong investment demand, a strong willingness to take
on leverage, a willingness of bankers to provide it, and eager inflows of foreign savings.
The economy is now in what is known as a "deleveraging cycle" - investment
demand is weakening, corporations are increasingly eager to reduce leverage and cover loan
losses, banks are less willing to extend credit to risky borrowers, and foreign savings
flows are softening (which is evident in the weakening dollar). All of these factors make
the Federal Reserve much less powerful than investors, and perhaps even Alan Greenspan may
believe.

As for investment strategy, we remain defensive, but are positioned to accomodate a
bounce if it occurs. Broader market action and better corporate bond action would move us
to a still-hedged but more constructive position. For now however, we remain on a Crash
Warning.

Sunday December 17, 2000 : Hotline Update

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The Market Climate remains on a Crash Warning here. While interest rates have been
behaving much better of late, corporate yields, and of course, stock yields, are still
acting less than favorable, so the overall trend of yields continues to be hostile.
Valuations remain extreme, and on a price basis, trend uniformity is also unfavorable.
Continued improvement on the interest rate front could move us off of a Crash Warning in
the weeks ahead. That would still leave us in an extremely unfavorable market climate, but
one which might be expected to generate a prolonged bear market slide rather than a sudden
crash. For now, a Crash Warning still remains in effect.

Bank stocks have now joined the cascade of earnings warnings, and my expectation is
that credit problems will become much more pronounced in the coming months. It's clear
that the Fed should and will indicate that inflation and recession risks are equally
balanced this week. It's impossible to rule out a statement that recession risks are
dominant, but I doubt it. To do so would signal either that the Fed is behind the curve,
or that business conditions are collapsing, which the Fed would never want to indicate
even if it was true. The worst thing possible, from the Fed's perspective, would be a loss
of business confidence in which businesses were unwilling to make new investments even if
credit was available. That's a situation that makes Fed easings completely ineffective,
and the Fed would never want to explicitly or implicitly trigger that. Even with a
"balanced" bias (a term which I prefer to "neutral"), the Fed would
still have the flexibility to cut rates in January, so there's nothing to be gained from a
more aggressive statement of risks. As for the possibility of an actual rate cut,
Greenspan's recent remarks underscored that current conditions are not at all like 1998,
when the crisis in global financial markets (and the exposure of banks to those markets)
made immediate interest rate cuts desirable. I doubt that Greenspan would take such pains
to point out the distinction between now and then if he believed that an immediate rate
cut was appropriate here.

One statistic that underscores the complacency of investors - the Investors
Intelligence survey indicates only 25.9% of advisors are bearish here, which is a reading
that you tend to see at tops rather than bottoms. Despite the clear difficulties with
earnings and technical action, advisors are evidently focused on the prospect of Fed
easing and on weak seasonal patterns. The low level of bearishness suggests that there's a
lot of selling that could be drawn out of this market, and not a lot of buying to be
induced.

In short, yield trends are improving, but the Market Climate remains on a Crash Warning
here. Valuations and unusual bullish sentiment allow for the possibility of significant
selling pressure ahead, but a more favorable yield environment could allow this to occur
more gradually than a vertical crash. A sustained improvement in market breadth, market
internals, and corporate bonds would be required to restore favorable trend uniformity.
That doesn't appear likely at this point, but we will respond to any change in Market
Climate if and when it occurs. We have no inclination to guess what the next Market
Climate will be, or when a shift will occur. For practical purposes, there is no need to
do so. For now, the climate remains a Crash Warning.

Friday December 15, 2000 : Special Hotline Update

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The Market Climate remains on a Crash Warning here. There's a possibility that the
climate could shift from Crash Warning to "extremely negative" depending on how
much follow through we see to the recent decline in interest rates. Such a shift wouldn't
make us particularly less defensive, but it would move us from expecting a compressed
crash to expecting a more prolonged bear market slide. Keep in mind that when we use the
term "crash" we are referring specifically to a decline of 15%-30% in prices
over a period of a few days. Moving off of a Crash Warning, if it occurs, would simply
reduce the possibility of that sudden a collapse. But unless we actually were to achieve
favorable trend uniformity, we will retain a significantly defensive position. In any
event, the current climate remains a Crash Warning, and since our job is to identify the
climate rather than make guesses about future shifts, our position remains on full defense
here.

Retail sales came in very weak on Wednesday, but Producer Prices were also fairly
modest, which reinforced hopes of a Fed easing early next year. Some recent academic
research has focused on why inflation has been so restrained in recent years. The strong
conclusion is that this experience of low inflation has not been due to productivity
growth, but can largely be traced to a slowdown in benefit costs, particularly health care
prices, and restrained import prices. Benefit costs appear to be on the rise again, so
it's effectively the strength in the U.S. dollar that has helped to restrain inflation.
That said, the U.S. dollar has been churning lately, rather than making significant new
highs, and higher oil prices have also been filtering through the economy. As a result, I
continue to expect inflation pressure despite a significantly slowing economy.

Chase and J.P. Morgan issued earnings warnings on Thursday. Many of the analysts seem
to be terribly surprised at the recent weakness in bank stocks and financials. Meanwhile,
I can't imagine how they didn't see this coming. There's this amazing sense of denial that
stocks are actually in a bear market, and that the weakness in the economy will actually
spill over into problems in earnings and credit risk. This slowdown in the economy has not
been particularly abrupt or steep. What makes it seem steep is just that investors
have been in total denial, so the warnings continually catch them off guard and trigger
sharp selloffs in stock prices. But from an economists point of view, and from the Fed's,
it is not at all clear that a monetary easing is appropriate.

People seem to think that the economy simply produces one good and the only issue is to
stimulate demand for it. On the contrary, I've long argued that recessions are periods
when the mix of goods supplied becomes poorly matched to the mix of goods
demanded. And in that environment, which I believe we're in, stimulating aggregate demand
through monetary easing isn't going to solve anything. You really only want to ease if
you're concerned that banks are denying credit to productive and sound borrowers, and
we're not seeing that yet. So while I wouldn't rule out a Fed easing, it's certainly not
the panacea that investors seem to think it would be, and I'm also not convinced that the
Fed wants banks to ease credit when all they seem to do with good money is to make more
risky loans of poor credit quality.

The bottom line, there is a strong likelihood that the economy is moving toward
recession. The knee-jerk response of investors seems to be that the Fed will ease and
everything will be rosy again. I don't place much faith on that belief being correct,
particularly because credit easing doesn't respond to the main problem in this economy,
which is that capital has been misallocated, and those bad investments are, well, going
bad. Higher oil prices and wage pressures don't help. Monetary easing doesn't dig you out
of all that. In fact, we tried it in the seventies, and got both inflation and recession.
There just isn't any easy solution that bails you out of overinvestment in capital goods,
overfinancing of garbage stock offerings, and overlending to poor credit risks. Bad
investments go bad. In my opinion, that's the lesson that will eventually be learned, but
so far, investors have been in denial every step of the way.

As always, though, we don't base our investment position on anybody's opinion,
including our own. Our discipline is fairly straightforward. On the stock side, build a
portfolio dominated by stocks exhibiting favorable valuation and market action. On the
risk allocation side, identify the Market Climate, and remain positioned accordingly until
there is objective evidence that the climate has shifted. For now, we're strongly
defensive. No guesses, forecasts or opinions required.

Sunday December 10, 2000 : Hotline Update

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The Market Climate remains on a Crash Warning here. Although bonds are acting better
lately, there is still not enough positive uniformity in yield trends to move our models
from a full featured Crash Warning to an extremely negative condition. Of course, both are
bearish conditions, but a Crash Warning is more unusual and immediate. No relief from
market action yet.

The latest election developments underscore why I view short term action as a coin
flip. No opinion at all. As far as economic reports go, the data have been well in line
with our own expectations, if not with the consensus view. First time unemployment claims
are in a well defined uptrend here, and the labor report showed slower job growth and more
wage inflation than consensus expectations. The wage inflation wasn't quite enough to
prevent investors from concluding that the Fed will ease, so we got a market rally on
Friday anyway. Investors also yawned when Intel disappointed yet again, and that
complacency was viewed as a sign that the tech selloff has bottomed - a view that will
persist only until fresh warnings come from companies that haven't warned before. That's
not likely to be far off.

The market increasingly sees the economic outlook as "neutral" in the sense
of no inflation risk and only small recession risk. If anything, traders are viewing a
January easing as the next likely move. This week will be important in nailing down the
market's expectations. Wednesday gives us retail sales, which I expect to be weaker than
expected, Thursday and Friday give producer and consumer inflation, respectively, which I
expect to be higher than consensus. By the end of the week, I would expect that the
markets will view the current situation more in line with how we view it: recession and
inflation risks are balanced, but only because we have both. That would make a Fed cut
less likely.

Main risk here: the U.S. dollar. I've written about this extensively in our research
reports, and I do believe that pressure on the dollar is becoming very strong. The dollar
doesn't do well, in general, when it is overvalued and supporting trends are unfavorable.
For the dollar, the main supporting trend is that of real interest rates. When U.S.
interest rates are falling and inflation pressures are not, the real interest rate is, by
definition, moving down, and that doesn't support an overvalued currency. I doubt that
investors in U.S. Treasuries realize how vulnerable long term bonds could be, even in an
emerging recession, if the dollar heads south in a hurry. So I wouldn't rule out the
possibility that the recent decline in Treasury yields turns out to be a spike bottom,
followed by an upward spike if and when the dollar weakens. I don't want to give the
impression that this must occur over the very short term, but the pressures are in that
direction.

The bottom line for us is simple. The Market Climate remains on a Crash Warning for
now, and we are appropriately defensive. There are certainly a lot of developments that we
are watching, but the only one that governs our market position is that Market Climate.

Thursday Morning November 7, 2000 : Special Hotline Update

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The Market Climate remains on a Crash Warning. Wednesday's decline was clearly in line
with our thinking - more earnings warnings. On the technology side from Apple, and now
it's getting interesting - an earnings warning from Bank of America, citing loan losses.
We're still seeing a wide divergence in internal action, so the technical picture is still
negative, as are sentiment, valuation, and economic indications.

On the interest rate front, the picture is very unclear. On the negative side, it's
likely that we're about to see a significant downward move in the U.S. dollar, which tends
to be a negative for bonds. But we've also got an undertone of serious economic weakness.
As I've noted before, Friday's employment report is likely to be surprisingly weak,
reflecting an emerging recession. Unless we also see a wage jump (which is likely but not
certain), bond investors could be at least temporarily encouraged about the possibility of
easier monetary policy. That could also potentially give us another stock market bounce
before failing again.

The bottom line, being on a Crash Warning, we're not at all inclined to trade in and
out of the market, because it would risk missing a market plunge that we've diligently
prepared for. At the same time, we have to be prepared for virtually any type of move over
the short term. All of which underscores why we're generally agnostic about short term
action, and attempt to always be positioned in line with the prevailing Market Climate.
Currently, that climate is negative, and we remain defensive.

Wednesday Morning December 6, 2000 : Special Hotline Update

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The Market Climate remains on a Crash Warning, and the market enjoyed a bear market
rally on Tuesday - fast, furious, and most probably prone to failure. The reason I tend to
be agnostic about short term action, particularly in a bearish trend, is that anything is
good for a few days of rally when the market is oversold. Alan Greenspan hinted that the
Fed was likely to move to a neutral bias, which is what I noted last week, the election
came one step closer to being finalized, and John Chambers of Cisco did a nice dance,
which also helped. More on that later.

Tuesday's rally continued to give deliver a wide internal divergence, with a large
number of both new highs and new lows. Breadth was better, in terms of the number of
stocks advancing, but there was still a profound divergence in the sense that gains were
heavily concentrated in the glamour technology stocks, while stocks not carrying the New
Economy banner showed much more modest gains. Needless to say, all the talk is that we've
seen the bottom. Opinion here - given the hope attached by investors to this rally, a
break below the recent lows would be the most likely point for a crash to occur.

A fair question is this: what if this was a bottom? The answer is simple -
there's a lot of room between here and new bull market highs, and if we're headed at all
in that direction, I would expect our trend models to pick up on a uniform trend fairly
quickly. What is really required is a further broadening of this rally, and a further
improvement in bond market action, preferably in corporate bonds as well as Treasuries. So
if the market can indeed produce sufficient uniformity to move our trend models back to a
favorable position, we'll quickly become more constructive. But that's not where we are
now, and as usual, there is absolutely no historical evidence to suggest that we can or
should pre-emptively become constructive before such a signal is actually in hand.
Frankly, I think that earnings warnings will get the better of the market before that
occurs.

Alan Greenspan made it clear that current conditions were not like 1998, which was
another way of telling the markets not to expect any surprise easings. As I've said
earlier, it's fairly clear that the Fed should move to a statement that inflation and
recession risks are equally balanced. Some call that a "neutral bias", but I'm
more inclined to think that there's risk of both inflation and recession. It's just
that those risks are equally large. Now, I expect that we'll see a surprisingly weak
employment number on Friday, and that may prolong this rally a bit if we don't see the
jump in wages that I'm also expecting. In any event, a shift in the risk statement by the
Fed will no longer be a surprise when it occurs, so the main surprises to watch for now
are on the employment front, and on the inflation front. Upward price pressure is the most
significant negative to watch for, because that's what would tie the Fed's hands from
easing, even in the face of an emerging recession.

A word on Cisco's analyst meeting. The comments from Chambers were so transparent I was
surprised that nobody seemed to catch on - virtually every time he talked about revenue
growth, he mentioned acquisitions. Cisco isn't enjoying 50% core revenue growth - it's
simply buying the existing revenues of other companies with overpriced toilet paper. As
long as the price/revenue ratio of the acquired company is lower than Cisco's
price/revenue ratio, per share revenues grow. And because Cisco's valuation is so skewed
in relation to its acquisition targets, the company can manufacture as much
"growth" as it chooses. But that growth rate is meaningless unless you partition
the growth contributed by each acquired component - similar to how retail analysts gauge
the health of a chain-store by looking at growth in same-store sales. Cisco never does
that, for fairly obvious reasons.

The bottom line - the Market Climate remains on a Crash Warning for now, and we have
zero inclination to pre-empt that based on a textbook bear market rally. If trend
uniformity is on its way to turning favorable, we'll know soon enough, and will respond
accordingly. Short term action is a coin flip, but I still strongly advise investors to
shut down part of their risk now if they are financially unprepared for a
follow-through to what is most probably an early bear market. We'll take any shift in the
Market Climate as it comes. For now, the climate remains very negative, and we are
appropriately defensive.

Tuesday Morning December 5, 2000 : Special Hotline Update

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The Market Climate remains on a Crash Warning here. Monday's rally was very messy
internally: decliners beat advancers on both the NYSE and the Nasdaq, and we're still
seeing very wide internal dispersion, with large numbers of both new highs and new lows.
That sort of internal dispersion is typical of market tops and early bear markets, and not
surprisingly, that's where we believe the market is. Monday's rally was clearly focused on
"old economy" stocks, following a favorable article in Barron's over the
weekend. But again, the internal action showed no relief. In our most aggressive accounts,
we did move our OEX put options to the February 720 puts for a slight credit, in order to
reduce our sensitivity to time decay as we watch market conditions unfold.

In recent weeks, I've noted that insider sales have been unusually heavy, and that
remains the case. And even in light of the decline we've seen, the percentage of bearish
advisors is still under the important 30% level. I say important because that's an
unusually low percentage that is often seen at market tops. Bearishness at market bottoms
is typically double that percentage. While there's a lot of talk about relatively high
mutual fund cash positions, there are two things to point out. First, cash positions
typically increase when interest rates are higher, so the majority of this increase in
cash positions is a response to risk-free T-bill yields over 6%. Second, the portion that
is unexplained by higher risk-free rates is simply an attempt to brace for investor
withdrawals. So even with those mutual fund cash positions, the statistical evidence is
clear that sentiment is still overly bullish, and that's a contrary indicator.

What's clear from all of this is that investors really haven't accepted the notion that
stocks are actually in a bear market. They are still overloaded in technology and stocks
in general, but rather than lightening up, they are constantly listening for the next
analyst to tell them that the market is close to a bottom. And of course, that's what CNBC
has been dishing out. As I said on Sunday, that's very sad, because many of these
investors risk literally being wiped out if those guesses turn out to be wrong. We haven't
seen the margin calls yet, but we're close. Remember that while brokers will let you
borrow $1 for every $1 of equity in your portfolio, they don't give you a margin call
until you owe more than $2 for every $1 of equity. If you're on 100% margin, a 25% drop in
the security will trigger a margin call. Most investors aren't using full margin, but even
assuming less aggressive margin, the decline we've seen is close to triggering margin
calls for a whole lot of tech investors. And once that happens, investors no longer have a
choice of whether to sell or not. They have to sell, or their broker decides for them.
With the personal savings rate negative, very few of these investors have the money to
meet those calls.

The bottom line is simple: the Market Climate remains on a Crash Warning, and we are
appropriately defensive. As always, everything else is filler.

Sunday December 3, 2000 : Hotline Update

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The Market Climate remains on a Crash Warning, which we continue to take seriously.
Now, as I stress constantly, our defensive position is based on the current Market
Climate, objectively measured, so we don't need to make forecasts in order to support our
position. If the Climate shifts, our position will shift, and it's not necessary to guess
whether such a shift will happen a week from now or a year from now. The current Climate
is a Crash Warning, and we're accordingly defensive.

That said, a number of you have asked that I share my opinions anyway. So here goes.
One of the things that strikes us is how universally investors are expecting a bounce
here. Most of the distinction between analysts is whether or not such a bounce would be
sustained. This is not analysis but hope. Investors need a rally, as do the
analysts and portfolio managers who appear on CNBC and the like. In the past week, I've
received some of the saddest calls I've ever heard, from investors who have lost literally
decades of retirement savings in the Nasdaq this year. A few of them were, and
frighteningly still are, on heavy margin. The fact that they've lost so much has paralyzed
them from selling, even as they helplessly watch their life savings disappear. This is so
damned sad, because these people keep saying things like "so and so says that we've
hit a bottom" or "they say that we could recover after the Fed meeting".
Then they ask me what I think. I just tell them that if they want to hear something
hopeful, I'm the wrong guy to ask. And then I tell them this. Don't listen to my opinion
about where the market is going. Don't listen the opinions of people on CNBC. Don't listen
to anybody who tells you where they think the market is going to go next. Right
now, you're taking a coin flip: heads you win, tails you're literally wiped out. That coin
flip is one you should never take. Shut down 40% of your position now. Expect to regret it
either because you sold some and the market goes up or because you didn't sell everything
and the market goes down. But lock in some regret, and put yourself in a position where
you're not wiped out regardless of what happens. They say thank you. And then I bet
they do nothing. Human nature. My opinion is that the market is likely to crash
vertically. And that's my reason. Too many people are depending on a rally to bail them
out, but so many of them are also under so much pressure to liquidate and cut their losses
that the selling is likely to persist, and at some point, the camel's back will break and
these poor people will finally hear themselves saying "sell everything".

A few words about the market backdrop. I'm expecting job growth to be decidedly weak in
Friday's report. Early into most recessions, the 3-month change in nonfarm payrolls turns
negative. With weekly claims for unemployment suddenly surging, I am expecting weak job
growth to show in the monthly numbers here. That won't raise the unemployment rate by
much, and I would expect that optimism about slow job growth will be offset by a larger
than expected jump in wages. If wages don't jump, Friday's employment report might be
worth a rally for a day or two.

Though I do think it would be appropriate for the Fed to drop its "inflation
bias" and admit that risks are now equally weighted between inflation and recession,
a moment's thought should convince you that this is not a good thing. My guess is that
we're likely to see inflation and recession. Despite another drop in the NAPM
index, the Prices Paid component was up. The CPI is also due for a pop, as are wages, and
if there's one thing worse than recession risk, it's recession risk that the Fed is
powerless to do anything about. In short, my impression is that as this month progresses,
it will become clear to investors that the Federal Reserve has much less flexibility to
cut rates than they would like. That said, anything is good for a couple of upside days.
But our models are firmly defensive here, and our most aggressive accounts continue to
hold OEX put options. To defend our stock positions, we've moved our Russell 2000 puts to
the March 500 series.

There are two areas I expect to weaken next. First, nearly everybody in tech believes
they have been at least slightly bailed out by the relative strength in Cisco and Sun
Microsystems. But it's just not logical to expect core revenue growth for these companies
to hold up in the face of a clear economic slowdown centered on deteriorating tech
spending. Cisco meets with analysts on Monday. We'll see how well they can dance. The
other area is financials - bank stocks in particular. Credit quality is literally
plunging, and default rates are clearly rising. In fact, on Friday, Moody's downgraded
Xerox corporate bonds to junk status. That's not isolated, but part of a very broad trend
that we've written about at length in the past year. Again, it's just not logical to
expect lenders to be unscathed by the credit deterioration of their borrowers,
particularly when the FDIC is accelerating the pace of bank downgrades.

In short, we don't need opinions or forecasts. Our Market Climate is based on objective
measurement of current market conditions, and until that Climate changes, we're
appropriately defensive. But since some of you have asked my opinion, now you have it. I
hope I've given you the reasoning behind those views. But for the purpose of setting our
position, my opinion is irrelevant. The Market Climate is on a Crash Warning. That's not a
"maybe we're in a bear market warning", or a "maybe the market might pull
back a little more before rallying warning", or a "maybe you shouldn't use quite
as much margin warning". It's a Crash Warning. Our models have never advised a more
defensive position. Everything else is just analysis and commentary.

Friday December 1, 2000 : Special Hotline Update

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The Market Climate remains on a Crash Warning here. I had expected the decline in the
market during November to reduce the level of bearishness in our econometric models, but
the technical deterioration has been so severe that the models have actually become more
negative. Historically, that's rare, and also ominous. As always, I have absolutely no
projection for what the market will do over the very short term. And with our strategy, we
don't need forecasts or projections. We deal with what is, and until conditions
change, valuations, trend uniformity, and yield pressures remain negative. That gives us a
Crash Warning, and we are accordingly defensive.

The expansion of new lows in recent days is notable. Richard Russell also points out
that the last three days have generated the "Hindenburg" signal that we've
discussed in the past. Essentially, there is an unusually extreme divergence in market
action, with large numbers of both new highs and new lows. When that has happened with a
weak advance-decline line and negative trend uniformity, it has often preceded nasty
downside follow-through. So although the damage in the Nasdaq has been severe, we're not
particularly inclined to look for or attempt to play a rebound.

We'll quickly change our stance if there is a shift in our objectively measured Market
Climate, but our subjective view is that the market is far from a real bottom. Far too
many investors jumped on the New Economy bandwagon and are still holding stocks like
Cisco, Sun, Oracle, Dell, Lucent and others. Those stocks were considered "no
brainers" earlier this year, and my impression is that despite recent declines,
investors are still holding on to those stocks in hopes of a rebound. While we certainly
will see intermittent rallies along the way, a real bottom will be marked by a thorough
capitulation and disgust with these issues. Even investors in Lucent haven't been shaken
out, in my view. The stock has plunged from 84 to 15 and change, and investors are still
holding on for the rebound.

As I've noted before, in a bear market, the psychology moves from "buy on
dips" to asking "How much lower can it go?" to "No, really, how much
lower can it go?" to "Sweet Mother of Joseph! How much lower can it go?"
The simple fact is that the Nasdaq could fall in half yet again and still be at only the
average valuation of the past decade. And those have been bull market valuations.
Remember, value is measured not by how far stocks have declined, but by the relationship
between prices and properly discounted cash flows. On that basis, the Nasdaq is still
outrageously overpriced.

Average investors here are sickened by the losses so far, but don't want to sell,
because they feel that stocks might rebound. Yet if the market does rebound, they won't
want to sell then either, because they'll figure that stocks are recovering. For many
investors, the only thing that will get them to sell is a truly catastrophic decline.
That's why investors tend to hold stocks all the way through a bear market until the
losses are so revolting that they cry "Just get me out!" For investors who are
fully prepared to ride out a bear market through what may very well be a 40% drop from
here, fine, and good luck. But for investors who are in the market with money they really
can't afford to lose, there's a simple strategy I always advise. If you have friends who
are helplessly watching their portfolio lose value, and they can't really afford to ride
out extreme losses, feel free to share this strategy with them. And here it is:

Sell 40% of the portfolio immediately. That's it. Guarantee yourself an acceptable
level of regret. If the market rallies, you'll regret having sold 40%. If the market
declines, you'll regret not having sold everything. But instead of gambling, and risking
an unacceptable level of regret, lock in an acceptable level and be done with it. Expect
in advance that you'll actually experience that regret, because I guarantee you will. But
it's a lot better than risking truly catastrophic regret if the market crashes, which
remains possible and even likely. Look, if the market rallies and you still want out, sell
another piece off. If the market declines, at least you took some action, and you can
always sell off another piece on the next rally. The worst thing you can do is to know
that you are taking far too much risk, and yet do nothing.

In the early part of a bear market, which I believe is where we are, that's probably
the best comment I can offer.

Thursday Morning November 30, 2000 : Special Hotline Update

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Just a note. Barring a 100 point Dow move on Thursday, the next update will be on
Sunday evening.

The Market Climate remains on a Crash Warning here. Wednesday's market action displayed
surprisingly weak market internals, with new lows expanding, and virtually no lead by
advancers over decliners. The Nasdaq was far worse, with significant negative breadth on
yet another yearly low. In the accounts we manage, we've been pleased to see our stocks
holding up relatively well, particularly compared to the Russell 2000 and OEX, which is
what we use to hedge. That has produced some satisfying gains in recent weeks. We have a
strong bias toward value and yield, as opposed to high P/E and dividend-less stocks
driving the major indices, so we tend to do best when those overvalued leaders are hit,
and investors seek the safety of dividends, lower P/E's and established industries. With
valuations still well twice their historical norm, we clearly hope to see more of that
sort of action in the months ahead.

Regardless of day-to-day action, the Climate remains on a Crash Warning here, and
that's really all we need to know from a hedging perspective. The Nasdaq looks oversold,
but bear markets can produce persistent oversold conditions, and we have no inclination to
trade in-and-out in any event. The bottom line; the deterioration in market internals is
somewhat alarming. The Nasdaq has been the focus of recent selling pressure, but with the
overall economy now showing much more tangible signs of a hard slowdown, I expect the blue
chip indices to experience more notable pressure as this bear market unfolds. As usual,
you should expect intermittent bear-market rallies to be fast and furious. With a Crash
Warning in effect, they will also continue to be prone to failure, and the risk of a
free-fall crash remains very real.

Short-term action is a coin-toss, and I don't place much expectation on the
sustainability of a rally once the Presidential race is finalized. It's not the
declaration of a winner, but a concession by the loser that will end this, and that
doesn't seem to be in the works. Even when that ultimately does occur, the backdrop of
negative market conditions is really what holds sway on the primary trend. Right now, the
evidence remains strong that stocks are in the early phase of a bear market.

Tuesday Morning November 21, 2000 : Special Hotline Update

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The Market Climate remains on a Crash Warning, so a strongly defensive posture
continues to be appropriate. The market isn't quite back to an oversold condition, so
there's no particular pressure for a bounce here. As always, we're agnostic about short
term action, but I do consider it important that new lows expanded considerably on Monday.
It's important because severe declines are generally preceded by what technicians call
"downside leadership" - basically, a surge in the number of stocks hitting new
lows. That's a rough way of measuring a breakdown in trend uniformity. While our own
methods are more precise and reliable, it's reinforcing to see confirmation from simpler
measures such as new lows and the advance-decline line. As for other measures of trend
action, after an unusual series of whipsaws, Richard Russell's Primary Trend Index
(www.dowtheoryletters.com) has also moved to the bearish side.

There's a general view that once the election is decided, the market will soar. Maybe.
But if I had to guess, I would expect it to soar for about 2 days before failing. The fact
that market participants expect a rally generally indicates they have already made
purchases or deferred sales on that expectation. So aside from initial reactions, I'm not
convinced that a resolution to the election will garner much follow-through. All of this
churning is taking place in a backdrop of an economic slowdown, and a gradual realization
that capital spending, profit margins, and earnings are all under more than temporary
pressure. That's why the selling pressure keeps coming back in on every bounce. And we may
very well be close to the point where investors react simultaneously. As usual, no
guessing is required. The Market Climate is on a Crash Warning, which is associated with
an unusually negative return/risk profile on average. That puts us in a strongly
defensive position, which will change when valuation, trend uniformity or yield action
shifts.

Sunday November 19, 2000 : Hotline Update

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Just a note, the latest issue of Hussman Investment Research & Insight was
mailed on Friday, and is available for download on our website. Also, the Hussman
Strategic Growth Fund now has a NASDAQ ticker. Beginning with Wednesday's close, it will
be reported under the symbol HSGFX. You can also obtain the daily net asset value of the
Fund on our Fund website, www.hussmanfunds.com .

The Market Climate remains on a Crash Warning. One of the interesting developments over
the past several weeks has been a sharp increase sales by corporate insiders, at the same
time that public sentiment readings remain highly bullish. In recent weeks, insider sales
have moved to a 2-to-1 ratio relative to insider purchases, even while the AAII survey of
individual investors has reported the lowest percentages of bears in history, save for a
single lower reading that was registered in August 1987. Needless to say, when corporate
insiders and individual investors disagree, the historical tendency has strongly favored
insiders being correct. And right now, the disparity in these gauges is wider than we've
ever seen it. That's very consistent with the kind of market action we've been seeing. On
one hand, we have a real persistence to selling pressure here, as evidence mounts that the
slowdown in earnings is getting teeth. At the same time, we have a public that has become
conditioned to view every selloff as a buying opportunity. Our view is relatively simple:
buy on dips works fine when trend uniformity is favorable, but is the road to ruin when
the Market Climate has shifted to a Crash Warning. Given that most observers fail to
recognize the profound shift in market conditions since early September, I expect that
investors are increasingly viewing these failed rallies with great confusion as to why
"buy on dips" isn't working lately.

One observer that finally gets it right on technology earnings is featured in the
November 20 issue of Barron's - Nancy Lazar, chief economist at ISI Group. Based on ISI's
own indicators, as well as a weekly comprehensive industry survey similar to the NAPM,
Lazar notes that the emerging economic slowdown is likely to be "weaker, longer,
everywhere". A few other comments: "Near-term, earnings expectations are still
too high. As global growth slows, those expectations will have to come down more and more,
and that is going to create indigestion for the stock market. I believe very strongly we
are experiencing a cyclical slowdown in tech, which will last longer and be potentially
deeper than expected. A simple point to make is that tech is cyclical. If anything, tech
is more cyclical today than in the past. It's a bigger share of capital spending. The
level of capital expenditures has been rising faster than the level of cash flow. And that
corresponds with this surge in debt growth. A lot of the junk-bond problems are
tech-related. So, the fact that tech cap-ex is now such a big part of cap-ex, and that a
lot of it has been leveraged make tech a more, not less, cyclical industry. It is cyclical
to start with, it moves with the business cycle, but it has just been a long time since
we've had a slowdown. The slowdown is here."

In our most aggressive accounts, we are now holding OEX January 730 puts for the
"bearish" portion of our hedge, and December 530 puts on the Russell 2000 to
hedge our stock positions. We expect to move our Russell hedge to January expiration in
the next couple of weeks, but intend to keep that portion of our hedge deep in-the-money.

As usual, no expectation for short term action. For now, the Market Climate remains on
a Crash Warning and a defensive position remains warranted by current conditions. Have a
great Thanksgiving.

Wednesday November 15, 2000 : Special Hotline Update

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The Market Climate remains on a Crash Warning here. Probably the most important thing
to keep in mind here is that stocks move in cycles and the probability is overwhelming
that stocks are now in the bear portion of that cycle. Primary moves tend to go far beyond
the expectations of most market participants. In the past two days, at least three
analysts have used the phrase "rock solid support" on CNBC when talking about
current levels in the stock market, which is one of the things that drives the idiot-meter
way into the red zone. It's fine to talk about support, but when you attach any form of
the word "rock", you've wandered into Fantasyland. Irving Fisher used exactly
the same words in 1929, about a week before the Crash. Historically, a market value of
anywhere between 7 and 11 times record earnings has been somewhere close to the bottom. At
nearly three times that level, it's not rock solid support the market is standing on -
it's quicksand.

Moreover, there is strong evidence that the economy is likely to slow sharply, and with
it, corporate profit growth. Our most reliable indicators are on a rare recession warning,
and as we discuss in the upcoming issue of Hussman Investment Research and Insight,
a recession is also increasingly likely ahead.

In a bull market, buying the dips is an appropriate strategy, and though it's not
really optimal to sell the rallies, you have to have some tolerance for brief selloffs
when they do occur. In a bear market, exactly the opposite is true. Selling the rallies is
the appropriate strategy, and though it's not really optimal to buy the dips (or cover
short sales on dips), you have to have some tolerance for brief rallies. In a bear market,
bounces from oversold conditions tend to be fast, furious, and prone to failure. That's
really what we're expecting from Tuesday's advance as well. There is certainly no
requirement for rallies to be limited to only a day or two, but very little importance
should be attached to any advance that does not restore favorable trend uniformity. At
present, the market is far from achieving that, so a strongly defensive posture remains
appropriate.

Sunday November 12, 2000 : Hotline Update

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We'll keep this brief. The Market Climate remains on a full-featured Crash Warning.
That's not a forecast as much as an identification of the current condition of the
market. Now, the fact is that this particular climate has occurred less than 4% of the
time in history, and both major crashes (1929 and 1987) as well as a host of less
memorable crashes all emerged from this condition. On average, the market has lost a great
deal of value in this climate, so we are very defensive here. While the market may very
well crash over the short-term, a short-term market forecast isn't necessary to justify
our position. All we need to know is that the market on average has suffered in
this climate. The reason I say this is to underscore that we are positioned based on what
the market is already doing. If the market begins doing something different,
namely, displaying uniform trend action, our models should pick that up fairly quickly,
and we will become more constructive. For now, we're highly defensive.

Tuesday Morning November 7, 2000 : Special Hotline Update

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The Market Climate remains on a Crash Warning here. In a sense, that's really all we
need to know. Everything else is analysis, detail, and elaboration. But the Market Climate
is what defines our market stance, and current market action places us in a very defensive
mode. Unless yield trends turn downward, favorable valuations are restored, or the market
establishes favorable trend uniformity, that defensive position will remain appropriate.

Cisco released a very upbeat earnings report after the close, and the stock got whacked
in early after-hours trading before clawing its way back to a modest loss. Cisco's chief
financial officer gave guidance of 50-60% growth for the coming year, which investors
seemed relieved to hear. It's really the same story. Give a company a stock with a P/E of
150 and let it use that as currency to make dozens of acquisitions a year, and you can
construct nearly any growth rate you want - for a while. I hate to say this, but my
daughter's goldfish could produce 50% earnings growth from acquisitions if it could get
its fins on a P/E of 150.

With favorable seasonality behind us, we have the election on Tuesday, and a probable
pickup in trading volume once that's over. Interest rates rose again on Tuesday, and our
gauges of yield pressures are suggesting higher stock yields ahead. At a dividend yield of
just 1%, even a minimal upward movement in stock yields could translate into severe
downside price action. But again, that's all analysis, detail and elaboration. Really, the
only thing we need to know is that we remain on a Crash Warning here.

Sunday November 5, 2000 : Hotline Update

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The Market Climate remains on a Crash Warning here. The typical period of favorable
month-end seasonality ends on Monday, and I expect trading volume to pick up after
Tuesday's election. As usual, there is no need to second-guess short-term market
direction. As long as the overall profile of market conditions remains on a Crash Warning
- that is, extreme valuations, unfavorable trend uniformity, and upward yield pressures -
a strongly defensive posture remains appropriate.

The October NAPM figures fell further below 50, and combined with a number of other
indicators, that reiterates the recession warning that we first saw in September. Those
other indicators are 1) a widening in credit spreads, 2) a relatively flat yield curve
(the current curve is actually inverted), and 3) the S&P 500 index below its level of
6 months earlier on a monthly closing basis. In addition, I noted last week that Treasury
bill yields had moved decisively above 6% after averaging less than 6% over the past year.
That occurrence has always been followed by poor market action. So not only do we have a
Crash Warning, we also have a series of other bearish indications.

One fact is particularly interesting. I went through all of the post-war recession
warnings, and it turns out that except for the one we saw in 1998 - the only one which was
not followed by a recession - every one of the previous post-war warnings occurred with
Treasury bill yields over 6%. In the latest issue of Barron's, Joseph Carson of UBS
Warburg notes that prior recessions have all been preceded by a collapse in liquidity
growth (including real M2, consumer and business credit growth, etc). That was not evident
in 1998, but it is very evident today. In short, the current recession warning is also
supported by factors which have been reliably bearish for economic growth.

The bottom line, despite the recent bounce in the major indices, a strongly defensive
posture is still warranted. In the event we do see favorable trend uniformity, we will
move to a still hedged but more constructive position. But here and now, we're comfortable
with a tightly defensive stance.

Wednesday Morning November 1, 2000 : Special Hotline Update

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The Market Climate remains on a Crash Warning here. As I've noted in prior updates,
investors appear to have latched onto the belief that all negative market outcomes end in
October, and clearly were almost frantic to get in on the market as we move into November.
Now that investors have done their buying on that thesis, the question is, "Now
what?"

Seasonally, we're still in a mildly favorable seasonal period that runs through Monday
of next week. So as usual, I am agnostic about short term action. But my impression is
that a lot of buying plans have been exhausted, and that the underlying tone of slower
growth remains with us. The Chicago Purchasing Managers Index slipped notably, and we'll
be watching the national PMI on Wednesday for further clues. Meanwhile, I should mention
that corporate insiders have turned substantially to the sell side. The insider
sale/purchase ratio has shot up dramatically in recent weeks, which may reflect a shift in
expectations toward weaker business results, but in any case is not good.

The bottom line, if we see enough strengthening in trend uniformity, we will quickly
move to a more constructive position, but the evidence thus far is inadequate. The market
has clearly worked off its oversold condition, and renewed weakness over the near term
would strengthen the prospects of more serious follow-through. For now, a defensive
position remains appropriate.

Tuesday Morning October 31, 2000 : Special Hotline Update

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The Market Climate remains on a Crash Warning. Despite the pressure on the Nasdaq, my
impression is that the market is enjoying two benefits. First, mutual funds generally end
their fiscal year on October 31st, so there has been a tremendous amount of tax-loss
pressure on secondary stocks. That is now behind us, so the broad market may enjoy a
better tone. As it happens, though, the vast majority of stocks have very little effect on
the major indices, which are capitalization weighted. Given the continued evidence that
stocks are in a bear market, what we're really expecting is that value stocks may hold up
generally better than the major indices, and that would certainly be good for all of our
portfolios, even the most defensively positioned ones.

Second, I suspect that there is a short-term rush to get in on the market in order to
take advantage of ostensibly favorable seasonality now that October is out of the way. As
I noted on the Sunday update, the longer term evidence of that is much weaker than is
generally believed, and we certainly wouldn't rely on weak seasonal patterns in the face
of a complete Crash Warning. But as usual, I am completely agnostic about short-term
action. So a bit more piling into stocks would not be surprising. On the other hand, if we
see renewed weakness after Monday's bounce, it will feed into that
"relentlessness" that investors are experiencing, and that would sustain the
risk of a near-term market crash. With the models still on a Crash Warning, there's no
need to second-guess short term action. We're defensive, and that's that. If trend
uniformity becomes more favorable, we'll quickly shift to a more constructive tone. But
here and now, we remain on a Crash Warning.

Sunday October 29, 2000 : Hotline Update

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The Market Climate remains on a Crash Warning. In the past, market crashes have
typically been preceded by a 9-15 week decline from an intermediate peak which takes the
Dow about 14% below its high. That's just the pre-crash action. My impression remains that
there needs to be a certain relentlessness to such a decline in order to trigger a
concerted wave of selling. For that reason, I'm more inclined to expect a near-term crash
if rallies emerge simply to clear oversold conditions, followed by renewed losses. That's
clearly been the case thus far. Investors seem to be pinning inordinately high hopes on
seasonal patterns that are in fact relatively weak historically. Specificially, the notion
that market declines magically end in October is controverted by numerous historical
instances. Most of the support for this idea focuses on the period since 1982, but that
period has been marked by 18 years in which the Dow has never violated the low of the
prior year. That's an environment in which a lot of spurious patterns can be drawn out of
the data. Moreover, the fact that everybody believes that things will get better once
October is out of the way means that they will have acted on that belief in the next two
days. Then what? Seasonally, one might expect typical mildly favorable month-end
seasonality through this week. But with our models on a clear Crash Warning, the risks are
far too great to rely on such weak seasonal assurances.

The OEX did decline significantly enough last week to offer us a surprisingly good
opportunity to roll our strike prices down, and in our most aggressive managed accounts,
we rolled from the OEX December 760 puts to the December 730 puts at a net credit of 20
points. I suspect we'll see more opportunities to roll our strikes down for strong credits
in the weeks ahead, but as I've noted several times, we are in no hurry to take put option
profits simply because we have them. Our interest is in being positioned in line with the
current Market Climate, and a significant hedge remains appropriate.

One of the most significant items we've been watching in recent weeks: the lowly
Treasury bill. Historically, when the yield on the 3-month Treasury bill has moved above
6% after averaging less than 6% over the prior year, the market has suffered significant
losses. The reason, I believe, is that over time, earnings, revenues, dividends, cash
flows and GDP have been well-contained in a 6% long-term growth channel. When competing
risk-free yields rise above that 6% rate, likely capital gains become insufficient to
compete, and investors begin to demand higher risk premiums. In other words, the yield on
stocks begins to be pressed higher, and the only way to drive stock yields up quickly is
to drive stock prices down. Here are the prior instances we've seen a break of that 6%
level on risk-free T-bills:

January 1969 (near the beginning of the 1969-70 bear market)
April 1973 (near the beginning of the 1973-74 bear market)
November 1977 (followed by a year of flat returns, despite a 5% dividend yield and a
market P/E of just 9)
September 1987 (no elaboration required)
October 2000.

In short, we've got a Crash Warning. Our models continue to view stocks as a poor
investment on the basis of valuation, and as a poor speculation on the basis of trend
uniformity and yield pressures. Even beyond the set of criteria we use to define the
Market Climate, we've seen at least a dozen other features which are consistent with
unusual risk. These include extreme sentiment, major earnings warnings, deteriorating
credit quality, rising inflation trends, yield curve inversion, a recession warning from
our 4-indicator composite, important and independent technical warnings from Peter
Eliades, Richard Russell, Lowry's, the Pitbull Crash Index, and Investech, and yield
competition which has historically signaled bear market trouble.

Wednesday Morning October 25, 2000 : Special Hotline Update

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The Market Climate remains on a Crash Warning here. Despite the popular view that the
market has already set a short-term bottom and is due to work its way higher, I'm not at
all convinced of that. In any event, the only thing that drives our hedging stance is the
Market Climate condition. With the exception of modestly favorable trends in utilities and
long-term Treasuries, the overall climate could not be worse. My impression is that those
two favorable trends in utilities and Treasury bonds reflect a flight to safety,
particularly given the virtual collapse in the riskier high-yield debt market. Overall,
this climate is still very amenable to a market crash, and until we see more uniformly
favorable trend developments, a strongly defensive position is warranted. Frankly, we're
not quite as hedged as we could be, but we are very sensitive to the risk of losses from a
larger hedge, if the market was to advance significantly. So our current position is the
most effective compromise that is reasonable, but it's certainly enough. Our models have
not advised as aggressive a hedge since mid-August through late-October of 1987, and
before that, July-August 1981, and late 1973-mid 1974. There is absoutely zero chance that
we would reduce or shift-down our current hedge for the probably temporary satisfaction of
taking a few put option profits here. Particularly in our most aggressive accounts, the
required discipline is a full-cycle perspective, not a day-trader's horizon.

After the close on Tuesday, Nortel, Compaq and Amazon all released earnings above
expectations. But due to soft revenues and weak guidance for the 4th quarter, Nortel
plunged on the news in after-hours trading, and Compaq lost about 10% of its value. Amazon
did better though, rising by about 10%. Speaking of earnings and revenues, GE was in
classic form, using its vastly overvalued stock as currency to buy Honeywell, one of the
few remaining large-cap stocks with a low price/sales multiple. I'm sure the guys at Cisco
are kicking themselves. Had Cisco made the same purchase of Honeywell with Cisco stock, it
would have been able to report a doubling of revenues per share, and a 40% jump in
earnings per share, without a bit of real growth. Which goes to show you how absolutely
meaningless the quarterly per-share figures are when hot companies are actively making
acquisitions using their overvalued stocks as the currency. Well, you'll know that Cisco
is getting desperate to pad their revenue numbers if they try to buy General Motors or
Caterpillar...

In short, the Market Climate remains on a Crash Warning. That's a warning, not a
certainty, but in any case, a strong defense is still in order.

Sunday October 22, 2000 : Hotline Update

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The Market Climate remains on a Crash Warning here. The S&P 500 closed out last
week with a gain of 1.7% for the week, while the Dow did somewhat worse and the Nasdaq
somewhat better. With the market down in each of the 6 preceding weeks, the bounce was
just enough to clear an oversold condition in the market. There is great hope among market
analysts that last week was the bottom. From our standpoint, we continue to view stocks as
being in a bear market, but if indeed we are to see a near-term crash, we would expect to
see the market weakening again fairly quickly. Panic declines tend to occur between 9-15
weeks off of an intermediate peak, and we would mark that peak as having been September
1st. My impression is that you need a sense of relentlessness to a decline in order for
investors to panic, so the status of Crash Warning will probably be sensitive to how the
market acts in the next several weeks.

Barron's had an interesting article reviewing what they call "creative
accounting" at Cisco, which is following in the mold of the glamour performance
stocks of the late 1960's. I included the lengthy quote about this in the Ticker section
of the October letter because I strongly expect this sort of creative accounting to be
recognized and eventually punished in coming quarters.

Another condition that is showing up on our radar; mass layoffs appear to be surging,
virtually from nowhere. In the past few weeks, we've seen layoff announcements from Dana,
Ingersoll Rand, Unisys, Imation, Qwest, Textron, and Georgia Pacific, not to mention
countless web companies such as WebMD and others. Apart from the separate announcements, I
haven't seen one word written about in the papers yet. Certainly not anything recognizing
it as an emerging trend. So in addition to slower revenue growth, soft capital spending,
and pressure on profit margins, keep your eye out for a trend toward higher layoff
announcements. The corporate bond market is reeling from credit concerns, and this may be
a related indication of economic weakness ahead.

The bottom line - there's no need to forecast or second-guess short term direction.
Market action will effectively tell us what we need to know. We would certainly not rule
out several days of churning or even further upside, but if we are going to see a market
crash, I would expect to see renewed weakness setting in relatively soon. If that does not
occur, we will still view stocks as being in a bear market, but we may move out of a Crash
Warning. In that case, we would back off somewhat on our put positions in our most
aggressive managed accounts. Either way, unless we actually see a resumption of favorable
trend uniformity (which is unlikely in the near term), we do expect to remain well hedged
against what we believe to be an ongoing bear market. As usual, our job is to keep our
position in line with the Market Climate. We still have a Crash Warning here, but if that
condition changes, we will respond accordingly.

Friday Morning October 20, 2000 : Special Hotline Update

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The Market Climate remains on a Crash Warning here. As I noted last Sunday, the market
has had 6 consecutive weeks of decline, so it is reasonable to expect a break in that
pattern. Even so, Thursday's rally showed a characteristic frenzy for big-name
large-capitalization tech stocks, while the broader market was more subdued on an
unweighted basis. The rally was clearly driven by a handful of techs such as Cisco, Sun,
and Microsoft, which vaulted 10-20% in the belief that all the bad news is behind us. Even
in a market-neutral position, that difference in behavior between the big names and the
broad market can cause a bit of day-to-day pressure, but it's clear that the explosive
performance of the big-cap techs was a frenzy to buy from oversold levels, rather than a
performance which can be sustained day after day over any extended period. The market has
shown a clear tendency to resume its decline after clearing an oversold condition. That
still allows for a modest amount of further upside, but I doubt that the next earnings
disappointment is far away. Regardless of short term action, we remain positioned in line
with the current Market Climate, which is a fairly unmitigated Crash Warning.

In our most aggressive managed accounts, we are staying with the current strike prices
in December options. When you hold short-dated options, you accept a relatively high rate
of time decay in return for greater option sensitivity, and it is optimal to change strike
prices frequently. The reason we are holding longer dated December options is specifically
because we do not intend to roll the strike prices back and forth frequently. Our
objective is to give the market time to express a decline more fully, and to limit the
decay of time premium while we hold our position. As we move through the coming weeks, we will
probably change our strike prices once or twice, but our strikes and expirations are
strategic choices which are consistent with the current Market Climate, and we currently
elevate patience during this Crash Warning over a quick profit based on day-to-day
fluctuations, especially when taking a quick profit would expose us to a great deal of
time decay on the remaining position.

A final comment: the trade figures showed a narrowing of the trade deficit in today's
report. It's often believed that this should boost GDP growth. The fact, however, is that
a smaller trade deficit by definition means less foreign capital inflow into the U.S., and
the typical result is a 1-for-1 drop in domestic capital spending. Why nobody seems to
know this fact is beyond me, but it's obvious in the data. That's not good news for the
industry that is most heavily dependent on continued strength in capital spending. And
that happens to be the technology industry.

Thursday October 19, 2000 : Special Hotline Update

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The Market Climate remains on a Crash Warning on this 13th anniversary of the 1987
crash. I'll say it again: the names are getting bigger. Today, we got a fresh earnings
disappointment from IBM, and once again, investors reacted to the selloff by buying the
dip and hoping that this morning was the bottom. I doubt it, but regardless of my personal
opinions, the more important factor here is the current Market Climate. And on that basis,
we continue to be tightly hedged. It's tempting to try to trade in and out around a
bearish position, but the risk of a crash remains significant. While stocks are
significantly off their highs, that is not what creates value. What creates value is the
relationship between the price of a security and the discounted stream of cash flows it is
likely to generate in the future. On that basis, we see absolutely no reason why the major
indices could not (and indeed, should not) lose more than half their value from current
levels.

There's no need to make forecasts however. All we need to know is that the Market
Climate is severely negative based on current conditions. If trend conditions were
to firm uniformly, we would shift to a more constructive tone, but our measures are
actually getting worse rather than better. Tuesday's bounce off the lows proved little
else but that investors have been well trained to buy on dips, and that they don't
recognize that the basic character of the market has shifted.

As I noted yesterday morning, even on days where the Nasdaq is down modestly, the
internal action is terribly divergent, with a handful of stocks down 20-80% in a day,
significant damage to second-tier stocks, and enough strength in the largest
capitalization stocks to conceal the devastation. It's clear that investors are retreating
to a narrower and narrower strip of "quality", focused on the largest names. Not
surprisingly, those stocks are also the most overvalued, so when they disappoint, as IBM,
Intel and others have, even that strip of quality becomes vulnerable.

Based on the after-market action of stocks releasing earnings on Wednesday afternoon,
the Nasdaq should have an upward bias on Thursday morning. Beyond that, I am, as usual,
agnostic about short term action. The Market Climate is on a Crash Warning, and we are
appropriately hedged.

Wednesday Morning October 18, 2000 : Special Hotline Update

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The Market Climate remains on a Crash Warning here. I noted last week that we had seen
5 consecutive declines in the NYSE Composite on significant downside leadership from new
lows. That condition certainly isn't always followed by market crashes, but when
the market has crashed previously, that condition has often preceded the crash by a few
weeks. When valuations have been high and trends weakening, it has generally been a good
idea to fully hedge or liquidate no later than the Monday following that signal, which
would have been early this week. We'll see.

As I noted on Sunday's update, with the market having endured 6 consecutive weeks of
decline, there's certainly room for some upward movement. But this being a Crash Warning,
there is no way on Earth that we would speculate against that warning. From Tuesday's
action, my personal inclination is to believe that rally attempts are likely to fail
quickly. The reason is the striking lack of uniformity in market internals. When we see a
down-day of say, 2% in the Nasdaq, it doesn't happen as a modest and orderly process.
Rather, we see lots of high-profile but second-tier stocks being hit for 5-7%, a handful
of stocks down 20% to as much as 70% in a single session, and just enough strength in the
largest cap stocks so that the relentless internal damage is relatively hidden. Over the
past several months, the names have been getting bigger and bigger, and at this point, it
looks increasingly as if the damage will finally hit those huge stocks that dominate the
capitalization weightings. At that point, the major indices will begin to reveal the same
kind of damage that's already so evident in the broad market. The recent break in Jim
Stack's "Gorilla Index" of high profile stocks (click
here for Jim's "Chart of the Week") suggests that this pressure is
increasing markedly.

Again, that's my personal inclination, and our positions are not driven by those views.
Even if my inclination was more positive, we would still remain tightly hedged. The only
thing that determines our hedging stance is the condition of the Market Climate. Right
now, we're on a Crash Warning, and I really do implore our clients to take that condition
seriously.

Sunday October 15, 2000 : Hotline Update

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The Market Climate remains on a Crash Warning here. Friday's strong bounce was clearly
not unexpected, but was surprisingly tepid in terms of overall breadth. With the
decliners having outpaced advances persistently day after day, we should have seen
somewhat more strength in advancing issues on Friday. As it happened, advances led
decliners by 1613 to 1255. That's another way of saying that the rebound was largely
focused on the large-cap glamour stocks that dominate the major indices, rather than the
rank-and-file.

We've had 6 consecutive down weeks in the S&P 500, so it's reasonable to allow for
a further rebound. At the same time, market internals didn't act well on Friday's rally,
and that raises the possibility of a fast failure. If that sounds like I'm completely
agnostic about short term action, you're exactly right. And as you know, our current
position has absolutely nothing to do with short-term forecasts. The Market Climate is on
a Crash Warning, and for hedging purposes, that's literally all we need to know. I realize
that I say that often, but it's important to underscore how unimportant short-term
movements are to our investment stance. Even with the market technically
"oversold", we wouldn't dare speculate against this Market Climate. So we'll let
market action unfold. There is an unusually strong risk of a market crash ahead, but
there's no reason why it has to occur without a further bounce. We just wouldn't bet on a
bounce actually happening.

Friday Morning October 13, 2000 : Special Hotline Update

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The Market Climate remains on a Crash Warning here. We've now seen 5 consecutive
declines in the NYSE Composite, with significant downside leadership by new lows, and that
condition has an odd tendency to shortly precede market crashes. Certainly, we wouldn't
place much weight on that event alone, as we wouldn't place much weight on Peter Eliades
"Sign of the Bear" alone. But currently, we have a Crash Warning and the most
negative econometric projections in history from our own models, some of the most extreme
sentiment readings in history, a proliferation of earnings warnings, a recession warning,
and bearish signals from advisories we respect: from Richard Russell, a renewed Dow Theory
bear market confirmation as well as a sell signal from his Primary Trend Index, and from
Jim Stack, a bear market distribution signal as well as a head-and-shoulders break in his
"Gorilla Index" of super-large cap stocks. None of this assures a market
crash, but we don't like the probabilities.

Clearly, we reject the notion that Thursday's difficulties were much related to the
tensions in the Middle East. In a bear market, the market focuses on bad news and shrugs
off good news, while the opposite is true in bull markets. It's not worthwhile to focus on
the myriad items of bad news. The main difficulties are clear: stocks are under pressure
because valuations are extreme, capital spending and profit margins are likely to come
under pressure, and market action has lost favorable trend uniformity. The Middle East
tensions have driven oil prices higher, and that's the news of the day that investors are
focusing on. But we expect the downside pressure on the market to become particularly
strong if the U.S. dollar comes under pressure. That's likely to occur as soon as there is
any palpable easing of those Middle East tensions, because the rush for a
"safe haven" will diminish. So again, in a bear market, all news tends to be bad
news.

The market is clearly "oversold", but as usual, we have absolutely nothing to
say about short term direction. We would allow for a potentially sharp bounce, as often
happens to relieve an oversold condition, but we would also allow for a continued plunge.
As always, our only interest is in being positioned in line with the Market Climate, and
that condition remains on a Crash Warning.

Thursday Morning October 12, 2000 : Special Hotline Update

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I'll keep this brief. The market continues to be hit by earnings disappointments, and
some of the abrupt losses in individual stocks are stunning. With the glamour stocks still
at breathtakingly high valuations, the decline we've seen so far is likely to pale in
comparison to the subsequent retreat to more reasonable multiples. When trend uniformity
was favorable, the impulse of investors to buy on dips was typically well rewarded. But
that impulse here is likely to be disastrous, and I doubt that investors recognize that
the underlying character of the market has shifted so profoundly. Shorter term, the market
is clearly oversold, but as always, we have no interest in attempting to time short term
action. Our models are collectively more negative than at any time in history, and the
Market Climate is on a clear Crash Warning. The possibility of violent short-term rallies
always exists during bear market declines, but our focus remains on maintaining a position
in line with the prevailing Market Climate. One thing I am watching over the short
term: if the NYSE Composite is down on Thursday, it will be the fifth consecutive decline
on significant negative leadership (as measured by the number of new lows). Historically,
that pattern has often preceded market crashes by about 2 weeks. That's not a signal that
I would put much weight on by itself, but if it does occur, it would tend to underscore
the generally negative tone from our formal models.

Sunday October 8, 2000 : Hotline Update

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Just a note - the latest issue of Hussman Investment Research and Insight is now
available for download. The print version was mailed on Friday.

The Market Climate remains on a Crash Warning here. We have no changes in our
recommended hedges here. At this point, all of our put options are in-the-money, and given
the pronounced negative condition of both our Market Climate and econometric models, our
intent is to allow those puts to become quite deep in-the-money before we shift strike
prices. Of course, that also means we are not taking put profits off of the table here.
The reason is that our models indicate a good chance of substantial downside follow
through, and in that environment, you typically prefer to allow the put options to run
further in-the-money.

We found the Presidential debates amusing, particularly the part about what to do with
the "surplus" being run by the Federal Government. The fact is that the
"surplus" is an illusion of accounting. When Social Security takes in more than
it pays out, the balance gets spent by the Treasury, and the Treasury gives the Social
Security Trust Fund some Treasury bonds and a kick in the pants. Ditto for the interest
earned by the Social Security Trust Fund. That money from Social Security is considered
part of the "revenue" that allows the government to report a surplus. But since
it is really being taken from Social Security in return for Treasury bonds, the amount of
government debt rises. The simple fact is that the Federal government has more debt
outstanding now than last year, the year before, or any time in history. So when you watch
the next debate, laugh with us. Or cry. But don't imagine that the Federal debt is
actually going down.

We're coming out of a period of favorable month-end seasonality, though you wouldn't
know it from last week. When the market can't sustain a rally during a seasonally
favorable period, coming off of an oversold condition, it's in bad shape. And we're
getting more signals from advisories that we respect. Most notably, Investech's
"Gorilla Index" of super-large cap stocks has broken deeply out of a long
head-and-shoulders top formation (www.investech.com), and Investech's Negative Leadership
Composite has just shifted to a "bear market distribution" mode. Meanwhile,
Richard Russell's "Big Money Breadth Index" has plunged to new lows
(www.dowtheoryletters.com), while Russell's Primary Trend Index is close to delivering a
sell signal on even a single additional day of market weakness. We review a number of
other major signals in the latest issue of Hussman Investment Research & Insight. Most
importantly, from our standpoint, our price-trend model has been negative since September
1st, and we moved to a Crash Warning in mid-September. As usual, we have zero interest in
trying to predict or "time" this market over the short term. Our primary focus
here is to be positioned in line with the prevailing Market Climate, and that position
remains decidedly defensive.

Monday Morning October 2, 2000 : Special Hotline Update

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The Market Climate remains on a Crash Warning here. In the past several weeks, our
econometric models have been generating bearish readings that are almost bizarre. In fact,
even if we disable all valuation criteria (which fits the past few years somewhat better),
the models still generate a projection that the market will lose over a quarter of its
value in the year ahead. In other words, the extreme projections are not uniquely due to
valuation, but are supported by technical, monetary, economic and sentiment conditions.
Leaving the valuation criteria in place, the forecasts are almost so negative as to defy
credibility (except that the projected decline would barely take the market P/E ratio to
its historical norm).

Now, as a practical matter, those econometric forecasts have absolutely zero
effect on our Market Climate approach. The Market Climate does not forecast or project the
market. Instead, it is a tool to identify current conditions, with no concern for
whether or not those conditions will change next week, next month, or next year. We are
strongly hedged here, not because we are forecasting a crash, but because market
conditions have in fact already deteriorated now. It's a subtle distinction, but a
crucial one. The Market Climate approach is a way of setting our positions on the basis of
what the market is doing, not on the basis of what it should or is expected
to be doing. If the market was to generate sufficient trend uniformity, we would quickly
move to a still-hedged but generally constructive position, regardless of valuations or
econometric forecasts. The fact that the econometric forecasts are so extremely negative
simply adds to our comfort in being positioned as we are.

The main numbers of importance in the coming week will be the NAPM Index on Monday
morning, and the labor report on Friday. Given the bounce in the Chicago NAPM index
reported last week, we wouldn't expect the national NAPM to remain below 50. If it does,
we'll have not only a Crash Warning, but a recession warning as well. We're getting signs
of a significant slowdown in other survey figures, but that Chicago NAPM number suggests
that we may very well defer a recession warning for a bit longer. As for Friday, a
particularly slow rate of job creation would be an immediate economic concern. The markets
might like such a figure in the short run, but in terms of measuring recession risk, a
slow jobs number would be a negative development. In any event, the only consideration
that is crucial here is to keep ourselves positioned in line with the current Market
Climate, and on that basis, a strong hedge remains appropriate.

Friday September 29, 2000 : Special Hotline Update

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Just a note. The next update will be available on Monday morning, October 2nd, about 2
hours before the market opens. Also, in our more aggressive Managed Accounts, we moved on
Wednesday from the OEX November 770 puts to the December 760 puts. In the event of a
serious downturn, we would expect to let those 760 puts become significantly in-the-money
before changing the position further.

The Market Climate remains on a Crash Warning. We've been anticipating a bounce for
several days to relieve the oversold condition of the market, and Thursday fit the bill
nicely. We continue to see the signs of capitulation that were discussed in the August
issue of Hussman Investment Research & Insight. Value and income stocks have displayed
good strength, with the Dow utility average hitting a new high on Thursday, while we're
seeing increasing pressure on technology and high valuation sectors of the market.

The Nasdaq was certainly strong on Thursday, which we viewed as a typical oversold
bounce, but no sooner did the market close than Apple Computer issued a warning about
upcoming earnings. Apple, which closed at 53 1/2 in regular trading, was promply given the
heave-ho in after-hours trading, losing 45% of its value, to 29 3/8. There wasn't quite as
much contagion as we saw when Intel warned, so there's only about 1% downside pressure on
the Nasdaq for Friday morning, based on after-hours trading. But it's clear to us that
these announcements are part of the cyclical downturn in technology earnings which we
continue to expect, and discussed at length in the August issue. Unlike Intel, which
blamed an easy target - European sales - Apple was more forthright, indicating "a
business slowdown in all geographics".

On the economic front, we'll be watching the NAPM indices closely on Monday. If the
Purchasing Managers Index comes in below 50 again, we'll have all of the conditions which
have historically been associated with the onset of a recession. An attentive client
forwarded an article to me which indicates that historically, anytime the 3-month change
in non-farm payrolls has been negative, the economy has been entering, or already in, a
recession. That signal actually arrived last month, though the effects of census workers
and the telecom strike suggest that more confirmation would be useful. A signal from our
own criteria would be one such confirmation, particularly if payroll data are weak in the
September report as well.

In short, we've seen the oversold bounce we've been anticipating. Favorable month-end
seasonality runs through the better part of next week, so we're fairly agnostic about
short-term action. What matters most, as usual, is that we are positioned in line with the
prevailing Market Climate. On that front, a very defensive position remains appropriate.

Wednesday Morning September 27, 2000 : Special Hotline
Update

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The Market Climate remains on a Crash Warning here. The main news of the day is that
our gold model has moved to a strong buy signal. We've got several conditions in place
which have historically been very favorable for gold, and gold stocks are typically best
bought on dips, rather than on rallies, moving average breakouts or the like. With the XAU
currently below 49, prices are unusually depressed here. Last year, we published an
analysis of conditions which favor gold stocks, and we've reprinted that in the Research
& Insight section of our Fund website, www.hussman.net (click
here). In general, the outlook for gold stocks is better when the NAPM Purchasing
Managers Index is below 50, but even if it bounces back above that level in the next
report, due October 2nd, the depressed level of gold prices is sufficiently compelling
here. We're not advising large positions, because of the volatility of gold stocks, but
some exposure in this area may currently be appropriate as part of a diversified
portfolio.

The market took another hit on earnings warnings, this time from Eastman Kodak among
others. At this point, the major indices are significantly oversold. We've noted that even
in very negative market environments, the market often works off oversold conditions by
rallying briefly before continuing lower. Market breadth, as measured by advances and
declines, has been persistently negative day after day, so we would certainly allow for a
short-term bounce. That said, our interest is never in trying to time short-term action,
and is always in making sure that our position is consistent with the overall Market
Climate. Given the very negative climate in effect here, a strongly defensive position
remains appropriate.

Sunday September 24, 2000 : Hotline Update

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The Market Climate remains on a Crash Warning here. As I noted in the August
newsletter, we've been expecting a significant increase in earnings warnings and
disappointments over the next several months, and Friday gave us a fairly preliminary
taste of that. After the initial panic on Intel's warning, tech investors evidently, and I
believe mistakenly, concluded that the problem was isolated, and took the selloff as a
buying opportunity. That's all well and good, until we get the next surprise, which isn't
likely to be far off. In the meantime, we noted last week that a number of important trend
breaks had occurred in the S&P and the Dow, and that such breaks are often followed by
a bounce before continuing lower. As we've seen in the past, once the market gets
significantly oversold, it often rallies briefly to work that off. So the early part of
next week is a coin toss, and the sentiment that "nothing can keep this market
down" may be worth at least a good rally on Monday. It's not something we would try
to trade, but it's not something which would surprise us either.

Of course, we have no interest in trying to time short term market movements. Instead,
our discipline requires us to position ourselves in line with the prevailing Market
Climate, and that climate is currently on a Crash Warning. So whether or not the market
has a brief bounce here is inconsequential to the main focus, which is that stocks are
vulnerable to a Crash here. Keep in mind that by "Crash", we don't just mean a
decline like we saw in the summer of 1998, or earlier this year in the Nasdaq. For our
purposes, a Crash is best defined as a period of about 5 days in which the market drops by
20-30%. In both 1929 and 1987, the market was already down about 14% in the 10 weeks before
those plunges occurred. Again, we have no interest in short term timing, but we do want to
make it clear that "Crash" is not just a figure of speech.

In the coming bear market, there's only one group that we think will be devastated more
than U.S. investors in Nasdaq stocks. And that's European investors in Nasdaq stocks. Over
the coming year, we expect those investors to be hit by both losses in the stocks, and
losses in the value of the U.S. dollar. Our econometric models are currently generating
the most negative Nasdaq projections in their history, eclipsing previous bearish records
in October 1969, October 1973, August 1987, and March 1998. Moreover, the euro is at about
the same level as it was a few months ago, when our models indicated one of the deepest
undervaluations of European currencies in post-war data. We've updated our chart of the
euro's valuation, which is available in the "Research and Insight" section of
our Fund website, www.hussman.net (click
here). From a European investor's perspective, an advance in the euro is a decline in
the value of the dollar. A probable decline in the Nasdaq, coupled with a drop in the U.S.
dollar, has the potential to produce particularly gruesome returns to those investors.

In summary, the short-term outlook is clouded by an oversold condition, and the
potential for a bounce to clear that condition. On the negative side, our models are on a
clear Crash Warning, and we have no intent to trade out of defensive positions for any
length of time under these conditions. The market remains vulnerable to further earnings
warnings in the weeks ahead, further earnings disappointments as reports are released
beginning in mid-October, and pressure on the U.S. dollar, which has the distinct
potential to carry long-term bonds down with it. In all, this is an extremely unhealthy
market environment, but one in which investors will take a slap in the face, a punch in
the gut, and are still willing to come back for a kick in the pants.

Thursday Morning September 21, 2000 : Special Hotline
Update

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We'll keep this brief. The Market Climate remains on a Crash Warning here. We've also
got some important breakdowns in a number of trends. These include the rising trendlines
in the S&P going back to last October, and the Dow going back to March. Jim Stack of
Investech also keeps track of what he calls "Gorilla stocks", and his index
appears close to breaking a head-and-shoulders top, as does Richard Russell's "Big
Money Breadth Index", tracking the advance/decline action of super large-cap stocks.
That said, trend breaks in an oversold market are often followed by knee-jerk rebounds
before continuing lower, so we're very agnostic about short-term movement here. It's just
as likely that we'll get a sharp bounce as it is that we'll get immediate downside
follow-through, so this is a market where you position yourself properly and then let the
market determine your next move. Again, the very short term outlook is a coin toss, and
we're not really interested in timing short term movements. All we need to know is that
given the current Market Climate, the proper position is highly defensive.

Tuesday Morning September 19, 2000 : Special Hotline Update

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The Market Climate remains on a Crash Warning. Monday's action was decisively negative,
with declining issues leading advancers by a 3-to-1 margin on both the NYSE and the
Nasdaq. The damage in the broad market was deep and abrupt, and its extent was understated
by the less severe declines in the capitalization weighted indices. Moreover, new lows
blew past new highs on both exchanges, with NYSE new lows topping 100 for the first time
in weeks. Needless to say, Monday's action also satisfied the criteria to complete Peter
Eliades' bear market signal, which we take as ominous in the context of our own Crash
Warning.

To its credit, our main price trend model turned negative on September 1st at the peak
of the recent market rally. On Friday of last week, our models moved to a fresh Crash
Warning. And seemingly out of nowhere, we are seeing earnings warnings, oil prices
threatening $40 a barrel, negative leadership from new lows, and a rare technical breadth
signal which has invariably preceded deep market plunges. If the S&P closes September
below 1500 and the NAPM Purchasing Managers Index stays below 50 for the month, we will
also move to a recession warning. Now, that doesn't mean that prices have to continue
lower immediately, but the next 6-8 weeks do appear particularly vulnerable given earnings
reporting season and the probability of disappointing earnings guidance for the 4th
quarter. We're treating this as a confirmed bear market, and at these valuations, one that
could prove to be historic. Unless valuations or trend conditions shift measurably, the
appropriate position is strongly defensive here.

Sunday September 17, 2000 : Hotline Update

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The Market Climate has shifted to a new Crash Warning this week. This indicates that
market conditions are characterized by extreme overvaluation, unfavorable trend
uniformity, and hostile yield trends. Last week's selloff in bonds and the S&P 500
combined were enough to tip the scales, given the prevailing trend of rising yields in
Treasury bills, commercial paper, and corporate bonds. It is not impossible for the market
to whipsaw back to a favorable yield environment, but our discipline requires us to
respond to Market Climate shifts without second guessing them. And right now, the
combination of valuations and trend conditions could not be worse. Last week, in our most
aggressive Managed Accounts, we increased the number of our OEX November 770 puts to about
1 for every $25,000-30,000 of portfolio value.

As we've discussed extensively, corporate earnings are likely to come under
significantly more pressure than is commonly expected, and we saw a glimpse of that last
week. Even Oracle, which posted blowout earnings numbers, sold off sharply following the
report, because revenues were softer than anticipated. We're not even in the heart of
earnings warning season yet. Moreover, earnings reporting season really begins
about mid-October, and even if Q3 figures are good, it's only then that we'll start seeing
guidance for the 4th quarter. Needless to say, we're expecting a lot of downward pressure
on earnings expectations over the next 6-8 weeks, and that concern is consistent with the
fresh Crash Warning that we've received.

Another feature of market action that has our attention is the narrow range in the
advance/decline ratio we've seen in recent weeks. Historically, major declines are often
preceded by about a month of extreme complacency, where the daily advance/decline ratio
fails to make a sharp move in either direction, followed by a sharp 2-3 day break that
completes the bearish signal. In 1998, Peter Eliades wrote an article in Barron's
detailing a measure of this, which he calls the "Sign of the Bear". He defines
this as a period of 21 to 27 consecutive days where the advance/decline ratio is no
greater than 1.95 and no lower than 0.65 on any day. The signal is complete if that flat
period is followed by a 2-3 day market break where the average advance/decline ratio is
below 0.75.

When Eliades wrote that Barron's article, there had only been 5 times in history that
the signal had been triggered: August 1929 (-89% drop), December 1961 (-29% drop), January
1966 (-27% drop), October 1968 (-37% drop) and December 1972 (-47% drop).

Eliades wrote that the signal had been triggered on April 6 of 1998, which at the time
was several weeks before the summer 1998 market plunge began. As it happened, the S&P
subsequently lost close to 20%, while the Nasdaq and Russell 2000 were each whacked by
over 30%.

On Friday of last week, after 23 consecutive days of narrow market breadth, the market
finally generated an advance/decline ratio of 0.59. Accordingly, the market will generate
Eliades' signal if the NYSE advance/decline ratio on Monday is below 0.90, or if the
average ratio on Monday and Tuesday is 0.83 or less. Again, with our own models on a Crash
Warning, it doesn't matter much to us whether this signal emerges. Nonetheless, it would
be a particularly rare, and somewhat compelling confirmation of what our own models are
telling us.

In short, the Market Climate has moved to a Crash Warning, which is consistent with a
deteriorating earnings outlook and rare technical market action. While that warning is in
place, we have to be at least temporarily braced for unusual trouble.

Sunday September 10, 2000 : Hotline Update

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The Market Climate remains characterized by extremely unfavorable valuations and
unfavorable trends. The only thing missing from a Crash Warning is a deterioration in
either long-term Treasury bonds or the S&P 500 Index itself. If we're going to get a
crash signal quickly, it would probably come from the S&P 500 dropping to the 1400
level. That's only a few percent away from current levels. Such a decline would
simultaneously trigger a recession warning. Neither signal is in hand yet, but we're
watching closely.

With the Fed probably on hold through the election, there's a real complacency among
investors regarding the risk of a market plunge here. I'm well aware of the seasonal
pattern: historically, in election years, the market has been very stable between
mid-summer and election day. But it's another thing all together to believe that this
ensures stability. Pinning a bullish case on election year seasonality isn't analysis,
it's superstition. With the S&P 500 at 29 times record earnings, our price-trend model
on a sell signal, and the most extreme sentiment readings since 1987, we have the elements
for a bear market well in place. We haven't seen these kinds of conditions in prior
pre-election markets, so we're not about to dismiss the risk of a plunge on the basis of
election-year seasonality.

We noted in the August issue that the AAII sentiment survey showed just 11.5% of
investors bearish. Jim Stack of Investech notes that the past 10 weeks have seen 2 such
readings below 12%, and the last time we saw that was in August 1987. Also, the CBOE
volatility index has hardly budged from its lows, and complacency among options traders is
also a typical occurrence at market peaks. Finally, we remain convinced that the earnings
outlook will turn out to be much less favorable than is generally believed, if only
because of the cyclicality of earnings in technology companies. The economy is clearly
slowing on the production side, but cost pressures remain strong, leading us to expect
continued inflation pressures. Slowing revenues and upward cost pressures just aren't
conducive to good earnings reports, and we're just entering the earnings warning season.

All of which suggests continued caution. This has been a long and drawn-out top
formation, and though complacency is tempting given the benign outlook on Fed policy,
there is a long list of reasons to be defensive here.

Monday September 4, 2000 : Hotline Update

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The Market Climate is characterized by extremely unfavorable valuations and unfavorable
trends. Our Price Trend model, which has been correctly favorable in recent weeks, has
just signalled unfavorable trend uniformity. That may seem odd with the major indices
strong, but this model also turned bearish the week of the 1987 top. Remember that the
model measures internal uniformity, and it's there that the market is suddenly showing
problems. Much of the internal weakness we're seeing is in economically sensitive areas:
retail, transports, corporate bonds, and so forth. Together, we would take that as a
signal that corporate earnings may soften much more ahead than is commonly expected.
Indeed, the NAPM Purchasing Managers Index came in at a 49.5% reading for August, which
now gives us 3 of the 4 signals which have invariably signalled an oncoming recession -
the fourth signal being a decline in the S&P 500 below its level of 6 months earlier.
That said, a recession signal is still not in, and we don't want to second-guess that.

At the same time, we would take the latest price trend sell as a bear market signal,
and we do want to respond to it. It's not a Crash Warning, so we're not changing the
number or strike prices of our OEX puts, but in our most aggressive Managed Accounts, we are
immediately raising the strike of our Russell 2000 puts in order to defend our stock
holdings against downside risk. In those Managed Accounts, we moved from the Russell 2000
December 490 puts to the December 520 puts on Friday afternoon. Those puts are still
out-of-the-money. But with the trend model negative, we don't want to allow much of a
decline before those puts offer a solid line of defense. The two questions to ask are
"What is the opportunity?" and "What is threatened?". At this point,
the main threat is to our stock holdings to the extent that our put options are
out-of-the-money, and the main opportunity is the relatively cheap cost of rolling the
Russell strikes higher in response. Again, because we do not yet have evidence of a Crash
Warning, we don't want to take an aggressive position by raising the number or strike
price of our OEX puts, but we do want to defend our stocks against a sustained market
decline.

The bottom line, our best trend model has shifted from constructive to negative here,
and we're taking that as a cue to defend our stock holdings against a likely bear market
decline. Though we wouldn't rule it out, there's still not enough upward pressure on
yields to anticipate a crash. For now, the market outlook is uniformly negative. With
prices still elevated, this appears to be a particularly good opportunity to defend
against downside risk.

Thursday Morning August 31, 2000 : Special Hotline Update

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Just a note - barring a 100 point Dow move on Thursday, the next update will be on
Monday evening at 8 PM Pacific Time.

The Market Climate remains characterized by extremely unfavorable valuations and
tenuously favorable trends. I say tenuously, because there is a good chance that our price
trend model is moving to a sell signal here. We use weekly data because they give somewhat
more reliable signals than daily data, but we've already seen enough deterioration in
market internals to suggest a likely sell signal. We're seeing internal weakness in
economically sensitive groups such as retail, transports, and lower rated corporate bonds,
and the advance-decline action of operating companies (ignoring preferred stocks,
convertibles, and the like) has also deteriorated. So even with the major indices
appearing relatively strong, the internal action of the market is weakening. There's no
chance of a Crash Warning here until long term interest rates move higher or the S&P
500 actually weakens below about the 1400 level, but already the weight of the evidence is
shifting to the bearish side. We won't raise any strike prices until we get a signal in
weekly data, and we would add modestly to the number of our put options only on a Crash
Warning, so we're still in a "wait and see" position for a couple of days.

Past performance does not ensure future results, and there is no assurance that the Hussman Funds will achieve their investment objectives. An investor's shares, when redeemed, may be worth more or less than their original cost. Investors should consider the investment objectives, risks, and charges and expenses of the Funds carefully before investing. For this and other information, please obtain a Prospectus and read it carefully. The Hussman Funds have the ability to vary their exposure to market fluctuations depending on overall market conditions, and they may not track movements in the overall stock and bond markets, particularly over the short-term. While the intent of this strategy is long-term capital appreciation, total return, and protection of capital, the investment return and principal value of each Fund may fluctuate or deviate from overall market returns to a greater degree than other funds that do not employ these strategies. For example, if a Fund has taken a defensive posture and the market advances, the return to investors will be lower than if the portfolio had not been defensive. Alternatively, if a Fund has taken an aggressive posture, a market decline will magnify the Fund's investment losses. The Distributor of the Hussman Funds is Ultimus Fund Distributors, LLC., 225 Pictoria Drive, Suite 450, Cincinnati, OH, 45246.

The Hussman Strategic Growth Fund has the ability to hedge market risk by selling short major market indices in an amount up to, but not exceeding, the value of its stock holdings. The Fund also has the ability to leverage the amount of stock it controls to as much as 1 1/2 times the value of net assets, by investing a limited percentage of assets in call options.

The Hussman Strategic Total Return Fund has the ability to hedge the interest rate risk of its portfolio in an amount up to, but not exceeding, the value of its fixed income holdings. The Fund also has the ability to increase the interest rate exposure of its portfolio through limited purchases of Treasury zero-coupon securities and STRIPS. The Fund may also invest up to 30% of assets in alternatives to the U.S. fixed income market, including foreign government bonds, utility stocks, and precious metals shares.

The Market Climate is not a formula but a method of analysis. The term "Market Climate" and the graphics used to represent it are service marks of the Hussman Funds. The investment manager has sole discretion in the measurement and interpretation of market conditions. Except for articles hosted from the web domains hussman.net or hussmanfunds.com, linked articles do not necessarily reflect the investment position of the Funds.